Fed unlikely to pause rate hike cycle by early next year, says Barclays Research

The Federal Reserve is no longer expected to pause the rate hike cycle early next year for two main reasons. First, the nomination of Governor Powell as the next Fed chair, in our view, represents a vote for continuity of policy. Second, the unemployment rate is falling again. At 4.1 percent, the risk of a substantial undershoot is rising, Barclays Research reported.

While monthly rates of inflation have firmed, this is unlikely to assuage concerns about soft inflation within the committee. Inflation was strong in early 2017 and negative base effects should weigh on y/y rates of inflation early next year. Participants concerned about inflation will likely need more information before declaring comfort with further normalization. This evidence is unlikely to come before mid-April.

Modest upgrades to GDP growth are expected in 2017 and 2018 and a lower path for the unemployment rate over the forecast horizon. While the median number of hikes for 2018 is likely to remain unchanged at three, expectations are for more four-hike projections relative to September.

"Altogether, we look for a 12.5 bps increase in the average dot for 2018 and 2019. A further upward adjustment will likely have to wait until either the tax cut passes or there is sufficient evidence to suggest that inflation is firming faster than anticipated," the report said.

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